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What are red flags when you’re choosing an umbrella company?

If there’s one thing we’re up against in this industry, is trying to be one of the good guys when there’s a rogue element out there that is claiming to be the same or better. Welcome to the world of umbrella companies folks!

Some so-called “umbrella companies” are actually tax avoidance schemes that use contrived pay arrangements dressed up as umbrella companies – and if that’s frustrating for us, as a compliant provider, it’s a total minefield for contractors and other parties in the supply chain. 

HMRC Spotlight 60

We talk about this A LOT (check out the Further Reading links at the end of this page) but we’re happy to see that HMRC are becoming more vocal on the subject too. At the end of August they published “Spotlight 60”, their latest guidance on umbrella companies, written for agency workers and contractors employed by umbrella companies. 

Umbrella company red flags

In this latest publication, HMRC warns against tax avoidance schemes (aka disguised remuneration schemes) masquerading as umbrella companies who give some or all pay in the form of a loan, salary advance, grant, annuity or any other payment which you’re told you’re not expected to pay back. 

The promoters of these schemes make them sound very plausible. They will pull every trick in the book to convince you that you take home more money and pay less tax, so that you will sign up with them and reject genuinely compliant umbrella companies.

But how do you tell when something sniffs of a tax avoidance scheme? Here are some of the key red flags highlighted by HMRC:

  • Umbrella companies offering a higher take-home pay
  • Unusual payment arrangements eg. payments from two different entities
  • Some or all payments said to be non-taxable
  • More money in your bank than on your payslip – make sure amounts match up
  • Referrals from umbrella comparison or broker sites
  • Umbrella retaining higher margins or fees
  • Umbrella companies outside the UK

Repaying a disguised remuneration loan to a third party

HMRC are rumbling these schemes all the time – and often the promoters just fold, selling on their liabilities to a third party. So a further word of warning – if you get paid via a loan from a disguised remuneration scheme, you may be contacted by a third party (ie. not the original lender) demanding repayment. 

The absolute kicker is…HMRC is very clear that the government is unable to intervene in a dispute between two private parties over loan contracts. The best way to avoid such legal wrangling is to not enter into anything that looks like remuneration by loan, no matter how attractive the terms look on the surface. 

Further reading…

We’re pleased that HMRC have been actively putting out contractor-focused communications to help people make an informed decision when it comes to choosing an umbrella company.

For more on this subject, you may be interested in the articles below:

A great resource from HMRC (no, we’re not kidding)

The problem with umbrella company comparison sites

Terms that scream “dodgy umbrella company”